Stand Under the Umbrella: Do Umbrella Insurance Policies Have to Cover Excess Claims When Underlying Policies are Maxed Out by Uncovered Claims?

Stand Under the Umbrella: Do Umbrella Insurance Policies Have to Cover Excess Claims When Underlying Policies are Maxed Out by Uncovered Claims?

By: Adam Deniger

Edited by: Molly MacKenzie

Indemnity Ins. Co. of N. Am. v. W&T Offshore, Inc., No. 13-20512, 2014 WL 2853586 (5th Cir. June 23,2014).

This case centers on whether an umbrella insurance policy must cover excess insurance claims when the primary policy was capped out by kinds of claims not covered by the umbrella policy. W&T Offshore, Inc. (hereinafter “W&T”) is an energy exploration and development company that suffered damage to its operations as a result of Hurricane Ike. The four Umbrella Insurance Underwriters (hereinafter “Underwriters”) anticipated that W&T would seek recovery for its Removal of Debris (hereinafter “ROD”) expenses under its Umbrella / Excess Insurance Policies (hereinafter “Umbrella Policies”), so they sought a declaratory judgment to determine the coverage. The Underwriters’ motion for summary judgment was granted by the district judge; W&T appealed to the Fifth Circuit.W&T purchased three types of insurance policies: (1) a commercial general liability policy (hereinafter the “Primary Liability Policy”); (2) five Energy Package Policies; and (3) four Umbrella Policies. The primary difference between the Umbrella Policies and the others is that the Umbrella Policies do not cover property damage or operators’ extra expenses incurred by W&T itself. The Umbrella Policies instead only cover claims by third parties against W&T. All of the relevant policies cover ROD claims.As a result of Hurricane Ike, W&T submitted over $150 million in claims for property damage and operators’ extra expenses under the Energy Package Policies. The Energy Package Policies only cover up to $150 million. The Underwriters thus determined that W&T would submit its ROD claims, totaling over $50 million, to the Umbrella underwriters. They argued that they were not liable for this sum because the Retained Limitof the Umbrella Policies – essentially the threshold for coverage – had not been met due to W&T exhausting the underlying policies with claims that would not be covered under the Umbrella Policies. The Underwriters relied on a section of their Insurance Agreement which they argue states that they are only obligated to pay for claims when the Retained Limit has been reached through claims that would be covered by the Umbrella Policies. W&T argued that this provision only delineates what the Underwriters must have done if those preliminary claims were of a kind covered by the Umbrella Policies. W&T argued that even if the claim was not explicitly covered under the Underwriters policy, the policy still requires the Underwriters to provide coverage when theapplicable limits of the underlying policies have been exhausted, as is the case here.The Fifth Circuit agreed with W&T’s understanding of the provision, finding that such an interpretation makes logical sense within the context of the Insurance Agreement. The Court determined that the Underwriters’ interpretation was erroneous and did not coincide with the rest of the agreement. The Insurance Agreement specifically states that the Underwriters must cover damages in excess of the Retained Limit, and does not state how that limit must be met, or that it can only be satisfied by claims covered by the Umbrella Policy.

The Fifth Circuit determined that the Umbrella Policies provide coverage through four different means: (1) if the Retained Limit is met, Underwriters pay sums for covered damages in excess of that limit; (2) if the underlying policies are reduced by claims covered under the policy, Underwriters pay sums, not in excess of the Retained Limit, but in excess of the reduced limit of the underlying policies; (3) if the underlying policies are exhausted by covered claims, umbrella Underwriters act as underlying insurers and are obligated to defend against covered claims; (4) if umbrella Underwriters provide the only coverage, they must act as the underlying insurers and defend against covered claims. Because the policy clearly establishes these methods of coverage and the facts of this case lend themselves to one of these possibilities, the Fifth Circuit reversed and rendered summary judgment in favor of W&T and against the umbrella Underwriters